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Lecture 9Evolution of Sales and Distribution Channel

Channel Functions

• Marketing Research

• Communications

• Contact

• Matching/Customizing

• Negotiation

• Physical Distribution

10 - 2

• Financing

• Risk Taking

• Service

• Relationship Management

• Product Assembly

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Factors Affecting the Channel System

• Customer Behavior– A number of consumer needs should be analyzed when designing

the channel structure.• Sometimes channel systems can be augmented to reach a new customer

segment.• Required services (variety) vs. the cost of services

• Competitors– A key decision is whether or not to emulate the competition’s

channel structure.

• Marketing Strategy– Marketing strategy should be linked to the channel system through

the value proposition.• E.g., value stores, upscale boutique

• Resources

• Direct and Indirect Channels

• Multiple-Channel Systems

• Hybrid Systems

• Direct channels:– Company controlled.– Sales force, direct marketing,

company owned retail stores.• Indirect channels:

– Intermediaries aid in the distribution process.

• Multiple-channel systems combine indirect and direct channels.

• Channels serve different customer segments.

• Hybrid System Permits specialization, and ultimately improves levels of performance.– Internet channels, though not

shown in Figure 10.6, complement other channels by producing customer service and timely new product information.

Channel Options

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Channel Selection

Three degrees of distribution density

IntensiveDistribution

(supermarket/convenience

ExclusiveDistribution(boutique)

SelectiveDistribution

(specialty retailer)

Target Market Coverage

Features and Evolution of the Sales and Distribution Channel

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Retail Overview

• The retail industry is one of the most promising fields of business in China

• The contribution of merchandise trade to China’s overall GDP reached about 36 percent in 2015

• Retail trade revenue for consumer goods in China has grown by at least ten percent YoY during every month from 2016 to 2017.

• Around eleven percent of the retail sales of consumer goods in China were attributed to the online shopping segment as of 2016.

• A highly segmented market

Increasing Pace of Development

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

1995Metro, ShanghaiCarrefour, Beijing

1989Shenzhen

1999Grand Gateway,

First Shopping CenterShanghai

1987Beijing

1992Beijing

1996Shenzhen

2000Oriental Plaza,

First Shopping MallBeijing 2010

Beijing & Shanghai

2008Beijing

2007Shanghai

2005Shanghai

2004Full Opening of China Market

For Foreign Investors

1992The Entry of Foreign Invested Department Stores

& Burgeoning Luxury Sector

2012Shanghai

Beijing

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Presence in Chinese Cities

113

46

113

% of global retailers present in each city

Retail Sales in Major Chinese Cities

2012 Retail Sales and Growth Rate

Source: China Statistics Bureau

Note: Figures for Dalian and Shenyang are on estimation.

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2.0%

4.0%

6.0%

8.0%

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12.0%

14.0%

16.0%

18.0%

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Marketing Orientation of the Sales and Distribution Channel Structure Evolution

• The evolution of the Chinese sales and distribution channel structure is proceeded under the guidance of market orientation.– Again from central planning to market forces– From singular vertical systems to a variety of channels

• Corporations have to understand and classify the customers’ needs and position the sales and distribution channel structure to cooperate other marketing strategies.– Greater variety and number of channel systems targeting different customer

groups and purchase situations from one-stop shopping malls, to specialty stores, boutique shops to convenience stores, supermarkets, and dollar stores

Flattening of the Sales and Distribution Channel

• The development of retail industry after 1990’s promoted the fattening of the sales and distribution channel structure. – Different from the long vertical channels controlled by the state in the

past– Closer to the customers and more channel options– Upgrade of channel functions (services, mentioned earlier)

• With the development of economics and fierce competition, the flattening of the sales and distribution channel structure evolution becomes the basic survival rule for corporations.– Less layers, lower cost, and better services– Still have much room for improvement

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The Unbalance of the Sales and Distribution

• The speed of the evolution of the sales and distribution channel in first tier cities has far exceeded that of the second and third tier cities and towns.– More advanced and modern retail channels in big cities

• Such kind of situation is caused by the unbalanced development of Chinese economics and the diversity of Chinese markets.– Opportunities in less developed areas– Infrastructure

• But second tier cities are quickly catching up

The Pains of Transformation

• With the development of economics and the increase of consumers’ purchasing power, the market demands expanded, which caused more distribution procedures. Maotai

• Market was disordered, and with a lot of shuttle commerce and hauls, as well as local protectionism, as provincial officials try to shore the local economy.

• The government regulated different prices for the products.– Prices of some products determined are by market forces while others

are set or controlled by the government, such as essential food items.

• In fact, China is a dual-economy – a capitalist society with socialist characteristics.– Lead to opportunistic profit-taking, smuggling and corruption!– Payment and bad debt

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Formats (for indirect distribution, push strategy)

• Regional agents: Manufacturers construct the national or regional agents network, and those regional agents are responsible for the local sales and distribution channel construction.

• Agents: Agents also achieve significant development comparing with the regional agents, and they are able to increase the market share and decrease the risk for the corporations.

• Wholesale markets: Main focus on small manufacturers, and concern with the quantities and low price.

• Note:, Even if you adopt an indirect strategy (push), you still need to work on the pull strategy (by advertising and working with retailers via joint promotions, etc..). In a way, you have two set of customers: distributors and final consumers! (i.e., both B2B and B2C)

Department Stores, Supermarkets, Chain Stores, and Foreign Investment Corporations

• The recession of the traditional department stores.

• The rapid growth of supermarkets, chain stores, and foreign investment corporations.

• POS system revolution

• Direct channels

• Today, China has most of the retailing formats in urban areas, the same as in other more advanced economies.

• Pull strategy, supported by advertising (push).

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Unpredictable Future for the Sales and Distribution Channel Development

• Chinese economics are steadily growing, and becomes one of the growth centers of world economics.

• With higher consumption levels, the needs of consumers become increasingly diversified.

• With the aggravated competition, the profits of the corporations are decreasing -- thus making distribution one of the most dynamic areas in marketing development.– Many new stores, especially chain stores, and more bankruptcies– Like elsewhere, retailing (format) is the most dynamic industry with

rapid changes that reflect those among the consumers and in the society.

Development of Logistics

• The Chinese logistics is at the early stage of development, and regionally focuses, but growing fast.

• Logistics suppliers have limited functions and services.

• Shortage of qualified logistics experts.

• The application of advanced IT system technologies is not universal.

• Distribution centers: warehouse facilities and transportation

• Courier services shot up to be world no. 1.

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To do list

• The Function Upgrade of Chain Stores

• The Integration and Transformation of Wholesale Industry

• The Adjustment of the Relationship between Manufacturers and Retailers

• Channel power and relationship management

Success Factors for Retailers

• Location, location, location– Market size, catchment, traffic, access

– Target market, demographics, lifestyle, brand store image

• Retailing format:– Assortment/variety, level of service

• Operational issues:– Promotion, patronage, loyalty

– Merchandizing, inventory,

– Cost, sales/turnover

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Case: Gome vs. Gree

• In 2004, Gree withdrew from Gome, or Gome took Gree products off shelves

• Gree, the top AC producer in China, wanted more control and keep multiple channels: Gome, and other distributors.

• Gome, the rising star in electronics stores (specialty retailer or category killer), wanted more control in (lower) pricing and promotion.

• Suning, the 2nd largest electronics chain, focused on 2nd-tier cities. Even Suning broke up with Gree at one time. Gree had to develop its own channels, which is not uncommon among Chinese manufacturers. Why?

• Finally after 3 years of standoff, they reached a compromise.

• Demarcating product lines.• Working with channel members to develop joint

solutions.• Putting more money into push and pull activities.• Developing financial arrangements, such as

commissions and higher margins.• Charging higher prices in the direct channel.• Using channel power.

Conflict Resolution Methods

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• Retail growth to remain focused on major urban areas

• But small cities and towns have become increasingly attractive and represent the new growth opportunities.

• Greatest concentration of young consumers and professionals in top three cities of Beijing, Shanghai and Guangzhou

• These markets have attracted the greatest foreign investment and the most new private businesses

• Concentration of wealth will allow for retailers to identify and more effectively target key consumer markets. Retail merchandizing needs to be more sophisticated

Outlooks